24 December, 2007

THE VIKING Energy windfarm project is inevitably stirring up emotions. The company behind the plans sees it as a project which carries great rewards, but not without risks. Here Viking chairman Bill Manson attempts to clarify the rewards and the risks.

Recent press reports about calls for a review of the structure of the Shetland Charitable Trust have almost unfailingly mentioned Viking Energy. Viking Energy has no comment on that. However, I’d like to make it clear that the project is currently about creating an investment opportunity. I’d like to remind people about the scale of that opportunity. I’d also like to remind them about the potential costs and risks attached to the opportunity.

Shetland Charitable Trust has agreed to purchase the project. At the same time it has created an investment provision of £3 million. This is not a committed expenditure, but it does include everything spent to date.

Viking Energy has a number of significant ducks that need to line up in a row. Until this happens, trustees cannot, and will not, be asked to make any commitments on the full windfarm project. There are many uncertainties. The feasibility and development phase aims to establish that the project can meet the investment criteria of Shetland Charitable Trust, the banks and SSE.

A decision to proceed with the full project will require a step change in the level of investment to be considered. To be clear, Shetland Charitable Trust is not committed to building a windfarm. It is committed, at this stage, to investigating a potentially lucrative investment opportunity for this community.

Key variables to be clarified over time include:

• securing planning consent for the windfarm;
• securing a transmission connection, with reasonable charges, to export the power;
• turbine supply terms and capital costs;
• interest rates and financing terms;
• long term arrangements to sell the power.


At a public meeting in Aith Hall on 19 April 2007, Viking Energy presented financial details relating to the project. It is important to note that all the figures are estimates and under ongoing review to be firmed up over time. The key points of the financial data are as follows:

• The project would have a capital cost implication for Shetland Charitable Trust of around £270 million. If the trust puts up 10 per cent to 20 per cent of this sum, the finance for the remainder of its costs is expected to come from commercial lenders.
• Viking Energy Partnership has projected cumulative revenue, to be shared by both partners, of approaching £3.2 billion. This is based on long-term power purchase agreements designed to ensure continuous income regardless of ongoing market forces.
• The project has a cumulative operating expenditure estimate, to be shared by both partners, of £2.3 billion. This sum includes cable usage charges, capital repayment and interest repayment. A significant proportion of this would be spent within Shetland on local supply chain activity.
• The project would achieve an expected, cumulative, profit for Shetland Charitable Trust in excess of £400 million (before depreciation and tax).
• This profit is estimated after making realistic assumptions regarding charges to be levied to pay for a transmission connection between Shetland and the national electricity grid. These charges are currently steeped in uncertainty. If uncertainty prevails or if charges are set at unrealistic levels then the windfarm investment cannot be made. The UK government is currently consulting on how a ‘capping mechanism’ to reduce these charges might work.
• The figures would allow a payback period of 10 to 11 years.
• The project will provide further economic returns including upwards of £50 million of rents to local landowners and crofters and upwards of £25 million of community benefit disturbance payments. The mechanisms to pay out direct community benefit monies are, as yet, undecided. It is normal for a significant proportion to be paid to the areas most directly affected by a windfarm.
• The project will provide an average of 234 jobs over the construction phase and an ongoing average of 55 jobs during the operational phase.

Updated financial details will be issued following the publication of the revised windfarm design. A submission for consent, under Section 36 of the Electricity Act, is expected to be made in Summer 2008.

The projected extra income to the Shetland community, that the windfarm is envisaged to produce, is substantially more than Sullom Voe has generated directly into the Shetland community purse. The decision to risk feasibility funding now gives Shetland a possible opportunity to achieve substantial returns. These would be greater than leaving our equivalent community funds on the stock market.

No investment is risk free. The Viking windfarm would be an investment in Shetland and very much for future generations in Shetland. It is based on Shetland’s world-class wind resource.

While Shetland’s oil terminal will be operational for a long time to come, the revenues coming to the community funds are declining. The Viking windfarm is an opportunity to enhance and continue those revenues beyond the oil era. It is also an opportunity to use Shetland’s abundant natural resources to make a serious contribution to national environmental targets.

Investigating this opportunity inevitably entails placing some money at risk. In years to come we might consider that it would have been remiss not to fully investigate the opportunity.

Notes:

Viking Energy’s website is available at www.vikingenergy.co.uk

The report of 9 May 2006 to Shetland Islands Council regarding “Structure, Governance and Finance” is available at www.vikingenergy.co.uk/viking_energy_ltd.asp

The report of 19 September 2007 to Shetland Charitable Trust regarding “A Potential Investment Opportunity – Viking Energy Limited” is available from Shetland Charitable Trust.

Viking Energy is a partnership between Viking Energy Ltd and SSE Viking Ltd. SSE Viking Ltd is a subsidiary of Scottish and Southern Energy plc. Viking Energy Ltd is the company established to represent the interests of the Shetland community in large-scale windfarm development in Shetland.

In September 2007, it was agreed that Shetland Islands Council’s ownership of Viking Energy Ltd should be sold to Shetland Charitable Trust.

The Viking windfarm represents the next generation of energy project, and seeks to harness Shetland’s unique wind resource. The involvement by the Shetland community as developer as well as host gives the community a level of control, which can ensure there is full public consultation with full environmental awareness and the growth of a local industry with a genuine competitive advantage.

Proposals for the Viking windfarm are based upon a c.600MW windfarm in Shetland.
These proposals are currently dependent on the introduction of a sub-sea cable between Shetland and the Scottish mainland.